Cl,opter 2: Covered Call Writing 87 
to be accepted or the break-even point will be raised significantly by rolling forward, 
one must consider the alternative of letting the stock be called away. 
Example: A covered write is established by buying XYZ at 49 and selling an April 50 
call for 3 points. The original break-even point was thus 46. Near expiration, suppose 
XYZ has risen to 56 and the April 50 is trading at 6. If the investor wants to roll for­
ward, now is the time to do so, because the call is at parity. However, he notes that 
the choices are somewhat limited. Suppose the following prices exist with XYZ at 56: 
XYZ October 50 call, 7; and XYZ October 60 call, 2. It seems apparent that the pre­
mium levels have declined since the original writing position was established, but 
that is an occurrence beyond the control of the writer, who must work in the current 
market environment. 
If the writer attempts to roll forward to the October 50, he could make at most 
1 additional point of profit until October (the time premium in the call). This repre­
sents an extremely low rate of return, and the writer should reject this alternative 
since there are surely better returns available in covered writes on other securities. 
On the other hand, if the writer tries to roll up and forward, it will cost 4 points 
to do so - 6 points to buy back the April 50 less 2 points received for the October 60. 
This debit transaction means that his break-even point would move up from the orig­
inal level of 46 to a new level of 50. If the common declines below 54, he would be 
eating into profits already at hand, since the October 60 provides only 2 points of pro­
tection from the current stock price of 56. If the writer is not confidently bullish on 
the outlook for XYZ, he should not roll up and forward. 
At this point, the writer has exhausted his alternatives for rolling. His remaining 
choice is to let the stock be called away and to use the proceeds to establish a cov­
ered write in a new stock, one that offers a more attractive rate of return with rea­
sonable downside protection. This choice of allowing the stock to be called away is 
generally the wisest strategy if both of the following criteria are met: 
1. Rolling forward offers only a minimal return. 
2. Rolling up and forward significantly raises the break-even point and leaves the 
position relatively unprotected should the stock drop in price. 
SPECIAL WRITING SITUATIONS 
Our discussions have pertained directly to writing against common stock. However, 
one may also write covered call options against convertible securities, warrants, or 
LEAPS. In addition, a different type of covered writing strategy - the incremental